OAKLAND, Calif.--(BUSINESS WIRE)--
Pandora (NYSE: P), the go-to music source for fans and artists, today
announced financial results for the third quarter ended September 30,
2016.

“Pandora’s transformation continues with the launch of compelling new
products and partnerships that open up significant revenue
streams," said Tim Westergren, Founder and CEO of Pandora. “Only Pandora
is uniquely positioned to create deeply personalized and easy to use
listening experiences that delight and engage listeners. A great product
that’s effectively monetized is the cornerstone of success in digital
music streaming.”

Third Quarter 2016 Financial Results

Revenue: For the third quarter of 2016, total consolidated
revenue was $351.9 million, a 13% year-over-year increase. Advertising
revenue was $273.7 million, a 7% year-over-year increase. Subscription
and other revenue was $56.1 million, a 1% year-over-year decrease.
Ticketing service revenue was $22.1 million, an approximate 25%
year-over-year increase1.

GAAP Net Loss and Adjusted EBITDA: For the third quarter of 2016,
GAAP net loss was $61.5 million compared to a net loss of $85.9 million
in the same quarter last year, and adjusted EBITDA was a loss of $6.6
million, compared to a profit of $31.5 million in the same quarter last
year. For the third quarter of 2016, adjusted EBITDA differs from GAAP
net loss in that it excludes $32.8 million in expense from stock-based
compensation, $15.8 million of depreciation and amortization expense,
$5.9 million of other expense and $0.4 million of provision for income
taxes2.

Cash and Investments: For the third quarter of 2016, the Company
ended with $264.0 million in cash and investments, compared to $311.3
million at the end of the prior quarter. During the third quarter of
2016, we borrowed $90.0 million under our credit facility to enhance our
working capital position. In addition, in September 2016, we signed
direct licensing agreements for recorded music with major and
independent labels, distributors and publishers. The majority of these
licensing agreements include minimum guarantee payments, some of which
are paid in advance. In connection with these agreements, prepaid
content acquisition costs increased $93.3 million in the third quarter
of 2016.

Cash used in operating activities was $120.5 million for the third
quarter of 2016, compared to $11.9 million of cash provided by operating
activities in the same period of the prior year.

Other Business Metrics

Listener Hours: Total listener hours grew 5% to 5.40 billion for
the third quarter of 2016, compared to 5.14 billion for the same period
of the prior year.

Active Listeners: Active listeners were 77.9 million at the end
of the third quarter of 2016, compared to 78.1 million for the same
period of the prior year.

Guidance

Based on information available as of October 25, 2016, the Company is
providing the following financial guidance:

Fourth Quarter 2016 Guidance: Revenue is expected to be in the
range of $362 million to $374 million. Adjusted EBITDA loss is expected
to be in the range of $51 million to $39 million. Adjusted EBITDA
differs from GAAP net loss in that it excludes forecasted stock-based
compensation expense of approximately $35 million, depreciation and
amortization expense of approximately $18 million, a provision for
income taxes of approximately $0.4 million and other expense, net, of $6
million and assumes minimal cash taxes given our net loss position.
Basic shares outstanding for the fourth quarter 2016 are expected to be
approximately 234 million.

Full Year 2016 Guidance: Revenue is expected to be in the range
of $1.354 billion to $1.366 billion. Adjusted EBITDA loss is expected to
be in the range of $140 million to $128 million. Adjusted EBITDA differs
from GAAP net loss in that it excludes forecasted stock-based
compensation expense of approximately $139 million, depreciation and
amortization expense of approximately $62 million, a benefit from income
taxes of approximately $0.3 million and other expense, net, of $24
million and assumes minimal cash taxes given our net loss position.
Basic shares outstanding for the full year 2016 are expected to be
approximately 231 million. We anticipate a non-GAAP effective tax rate
between 30-35% for full year 2016.

Third Quarter 2016 Financial Results to be Presented During Analyst
Day Event: Pandora will host an analyst day event and video webcast
today starting at 1:30 p.m. PT/4:30 p.m. ET to provide financial
analysts an opportunity to hear from members of the Pandora leadership
team and discuss Pandora’s strategic vision in light of the recently
announced product transformation and landmark label deals. The live
video webcast of the event will be available on the Pandora Investor
Relations website at http://investor.pandora.com.
A live domestic dial‐in is available at (877) 355‐0067 or
internationally at (614) 999‐7532, using passcode 93896108. A domestic
replay will be available via video webcast replay until December 2, 2016
at http://investor.pandora.com.

ABOUT PANDORA

Pandora is the world’s most powerful music discovery platform – a place
where artists find their fans and listeners find music they love. We are
driven by a single purpose: unleashing the infinite power of music by
connecting artists and fans, whether through earbuds, car speakers, live
on stage or anywhere fans want to experience it. Our team of highly
trained musicologists analyze hundreds of attributes for each recording
which powers our proprietary Music Genome Project®, delivering billions
of hours of personalized music tailored to the tastes of each music
listener, full of discovery, making artist/fan connections at
unprecedented scale. Founded by musicians, Pandora empowers artists with
valuable data and tools to help grow their careers and connect with
their fans.

This press release contains forward-looking statements within the
meaning established by the Private Securities Litigation Reform Act of
1995, including, but not limited to, statements regarding expected
revenue and adjusted EBITDA. These forward-looking statements are based
on Pandora's current assumptions, expectations and beliefs and involve
substantial risks and uncertainties that may cause results, performance
or achievement to materially differ from those expressed or implied by
these forward-looking statements. Factors that could cause or contribute
to such differences include, but are not limited to: our operation in an
emerging market and our relatively new and evolving business model; our
ability to estimate revenue reserves; our ability to increase our
listener base and listener hours; our ability to attract and retain
advertisers; our ability to generate additional revenue on a
cost-effective basis; competitive factors; our ability to continue
operating under existing laws and licensing regimes; our ability to
enter into and maintain commercially viable direct licenses with record
labels for the right to reproduce and publicly perform sound recordings
on our service; our ability to establish and maintain relationships with
makers of mobile devices, consumer electronic products and automobiles;
our ability to manage our growth and geographic expansion; our ability
to continue to innovate and keep pace with changes in technology and our
competitors; our ability to expand our operations to delivery of
non-music content; our ability to protect our intellectual property;
risks related to service interruptions or security breaches; and general
economic conditions worldwide. Further information on these factors and
other risks that may affect the business are included in filings with
the Securities and Exchange Commission (SEC) from time to time,
including under the heading “Risk Factors” in our Annual Report on
Form 10-K for the current period.

The financial information contained in this press release should be read
in conjunction with the consolidated financial statements and notes
thereto included in the Company's most recent reports on Form 10-K and
Form 10-Q, each as they may be amended from time to time. The Company's
results of operations for the current period are not necessarily
indicative of the Company's operating results for any future periods.

These documents are available online from the SEC or on the SEC Filings
section of the Investor Relations section of our website at investor.pandora.com.
Information on our website is not part of this release. All
forward-looking statements in this press release are based on
information currently available to the Company, which assumes no
obligation to update these forward-looking statements in light of new
information or future events.

Non-GAAP Financial Measures

To supplement our condensed consolidated financial statements, which are
prepared and presented in accordance with accounting principles
generally accepted in the United States ("GAAP"), the Company uses the
following non-GAAP measures of financial performance: non-GAAP gross
profit, non-GAAP net income (loss), non-GAAP basic EPS, non-GAAP diluted
EPS and adjusted EBITDA. The presentation of this additional financial
information is not intended to be considered in isolation from, as a
substitute for, or superior to, the financial information prepared and
presented in accordance with GAAP. These non-GAAP measures have
limitations in that they do not reflect all of the amounts associated
with our results of operations as determined in accordance with GAAP. In
addition, these non-GAAP financial measures may be different from the
non-GAAP financial measures used by other companies. These non-GAAP
measures should only be used to evaluate our results of operations in
conjunction with the corresponding GAAP measures. Management compensates
for these limitations by reconciling these non-GAAP financial measures
to the most comparable GAAP financial measures within our earnings
releases.

Non-GAAP gross profit, non-GAAP net income (loss), non-GAAP basic EPS
and non-GAAP diluted EPS differ from GAAP in that they exclude
stock-based compensation expense, intangible amortization expense,
amortization of non-recoupable ticketing contract advances, transaction
costs from acquisitions and one-time cumulative charges to cost of
revenue – content acquisition costs that are not directly reflective of
our core business or operating results. The income tax effects of
non-GAAP net income (loss) before provision for income taxes and the
related non-GAAP adjustments have been reflected in non-GAAP net income
(loss), non-GAAP basic EPS and non-GAAP diluted EPS.

Cost of Revenue – Content Acquisition Costs Charges: Cost of
revenue – content acquisition costs included two one-time cumulative
charges in the third quarter of 2015. The first charge related to the
settlement of an outstanding lawsuit related to sound recordings
recorded prior to February 15, 1972. On April 17, 2014, UMG Recordings,
Inc., Sony Music Entertainment, Capitol Records, LLC, Warner Music Group
Corp. and ABKCO Music and Records, Inc. filed suit against Pandora Media
Inc. in the Supreme Court of the State of New York. The complaint
claimed common law copyright infringement and unfair competition arising
from allegations that Pandora owed royalties for the public performance
of sound recordings recorded prior to February 15, 1972. In October
2015, as part of our strategy to strengthen our partnership with the
music industry, the parties reached an agreement whereby we agreed to
pay the plaintiffs a total of $90 million in exchange for the dismissal
of the lawsuit, a release of all claims and a covenant not to sue for
our use of pre-1972 sound recordings extending to December 31, 2016. The
first installment of $60 million was paid in October 2015 and the
remaining four installments of $7.5 million were paid in December 2015,
March 2016, June 2016 and September 2016. Pursuant to this settlement,
which covers approximately 90% of total pre-1972 spins on our service,
we recorded a one-time adjustment of $57.9 million to cost of revenue -
content acquisition costs in the third quarter of 2015 related to
pre-1972 spins played through September 30, 2015.

The second charge related to management’s decision to forgo the
application of the RMLC publisher royalty rate from June 2013 to
September 2015. In June 2013, we entered into an agreement to purchase
the assets of KXMZ-FM and in June 2015 the Federal Communications
Commission ("FCC") approved the transfer of the FCC licenses and the
acquisition was completed. The agreement to purchase the assets of KXMZ
allowed us to qualify for the RMLC royalty rate of 1.7% of revenue for a
license to the ASCAP and BMI repertoires, before certain deductions. As
a result, we recorded cost of revenue - content acquisition costs at the
RMLC royalty rate starting in June 2013, rather than the rates that were
set in district court proceedings in March 2014 for ASCAP and in May
2015 for BMI. In the third quarter of 2015, despite confidence in our
legal position that we were entitled to the RMLC royalty rate starting
in June 2013, and as part of our strategy to strengthen our partnership
with the music industry, management decided to forgo the application of
the RMLC royalty rate from June 2013 through September 2015. As a
result, we recorded a one-time cumulative charge to increase cost of
revenue - content acquisition costs of $23.9 million in the third
quarter of 2015 related to spins played from June 2013 through September
30, 2015.

For the third quarter of 2015, management considered its operating
results without these two one-time cumulative charges to cost of revenue
– content acquisition costs when evaluating its ongoing non-GAAP and
adjusted EBITDA performance because these charges reflect aggregate
charges to royalty rates across several prior years of activity, and are
not directly reflective of our business or operating results.

Ticketfly and Rdio Transaction Costs: consists of transaction
costs paid in connection with the acquisitions of Ticketfly and certain
assets of Rdio, which were completed in the fourth quarter of 2015.
Ticketfly and Rdio transaction costs are included in the general and
administrative line item of our GAAP presentation. For the third quarter
of 2015, management considered its operating results without these
charges when evaluating its ongoing non-GAAP and adjusted EBITDA
performance because these charges are not believed by management to be
reflective of our core business, ongoing operating results or future
outlook.

Stock-based Compensation Expense: consists of expenses for stock
options and other awards under our equity incentive plans. Stock-based
compensation is included in the following cost and expense line items of
our GAAP presentation: cost of revenue – other, cost of revenue –
ticketing service, product development, sales and marketing and general
and administrative.

Although stock-based compensation is an expense for the Company and is
viewed as a form of compensation, management excludes stock-based
compensation from our non-GAAP measures for purposes of evaluating our
continuing operating performance primarily because it is a non-cash
expense not believed by management to be reflective of our core
business, ongoing operating results or future outlook. In addition, the
value of stock-based instruments is determined using formulas that
incorporate variables, such as market volatility, that are beyond our
control.

Income Tax Effects of Non-GAAP Adjustments: The Company adjusts
non-GAAP net income (loss) by considering the income tax effects of its
non-GAAP net income (loss) before provision for income taxes and the
related non-GAAP adjustments. The Company is currently forecasting a
non-GAAP effective tax rate of approximately 30% to 35% for the full
year 2016. The Company does not expect to pay significant cash income
taxes for the foreseeable future due to its net operating loss position.

Benefit from (Provision for) Income Taxes: consists of expense
recognized related to U.S. and foreign income taxes. The Company
considers its adjusted EBITDA results without these charges when
evaluating its ongoing performance because it is not believed by
management to be reflective of our core business, ongoing operating
results or future outlook.

Depreciation and Intangible Amortization Expense: consists of
non-cash charges that can be affected by the timing and magnitude of
business combinations and asset purchases. Depreciation is included in
the following cost and expense line items of our GAAP presentation: cost
of revenue – other, cost of revenue – ticketing service, product
development, sales and marketing and general and administrative.
Intangible amortization expense is included in the following cost and
expense line items of our GAAP presentation: cost of revenue – ticketing
service, product development, sales and marketing and general and
administrative. Depreciation and intangible amortization expense also
consists of non-cash amortization of non-recoupable amounts paid in
advance to the Company’s clients pursuant to ticketing agreements.
Amortization of non-recoupable ticketing contract advances is included
in the sales and marketing line of our GAAP presentation. Management
considers its operating results without intangible amortization expense
when evaluating its ongoing non-GAAP performance and without
depreciation and intangible amortization expense when evaluating its
ongoing adjusted EBITDA performance because these charges are non-cash
expenses that can be affected by the timing and magnitude of business
combinations, asset purchases and new client agreements and may not be
reflective of our core business, ongoing operating results or future
outlook.

Management believes these non-GAAP financial measures serve as useful
metrics for our management and investors because they enable a better
understanding of the long-term performance of our core business and
facilitate comparisons of our operating results over multiple periods
and to those of peer companies, and, when taken together with the
corresponding GAAP financial measures and our reconciliations, enhance
investors' overall understanding of our current financial performance.

In the financial tables below, the Company provides a reconciliation of
the most comparable GAAP financial measure to the historical non-GAAP
financial measures used in this earnings release.

1 Ticketfly’s results are included in Pandora’s consolidated
financial statements subsequent to the acquisition date of October 31,
2015. Related year-over-year growth rates are calculated based on
Ticketfly’s pre-acquisition results.

2 Adjusted EBITDA for the third quarter of 2015 also excluded
expense from cost of revenue – content acquisition costs due to one-time
cumulative charges of $57.9 million for the pre-1972 sound recordings
settlement and $23.9 million as a result of management’s decision to
forgo the application of the Radio Music Licensing Committee (“RMLC”)
publisher royalty rate from June 2013 to September 2015 and Ticketfly
and Rdio transaction costs.

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